[opendtv] Re: Pro a la carte, Another Perspective

  • From: Craig Birkmaier <craig@xxxxxxxxx>
  • To: opendtv@xxxxxxxxxxxxx
  • Date: Wed, 19 Dec 2007 10:06:46 -0500

At 3:25 AM -0500 12/19/07, Richard C. Ramsden wrote:

You should send this missive to the Rat, aka Disney.
It's not the cable companies that are against a la carte.

If you need a hint, Disney owns ESPN...



AyaaaaYup!
But it looks like Disney may have reached a plateau with respect to how much profit they can wring out of the ESPN franchise, and the prospect that ala carte could cause a big hit to Disney's bottom line is scaring large Disney investors enough to sell off their positions. 

Here are two recent articles that examine many of the issues:
The first, written in September, suggests that there might be problems for Disney in the next quarterly report. The second, written after Disney reported yet another quarter of significant growth for its' cable properties takes a dim view of the longer term.
The first article claims that Disney collects as much as $3.25 per subscriber per month from every extended basic subscriber in the country. I have heard from other sources that the average is this high. Whatever the case, the prospect that the millions of homes that do not watch ESPN could elect not to pay that monthly fee is daunting; perhaps enough to cause Disney to start losing huge amount of money because of the contracts it has with various sporting leagues... 

Regards
Craig



http://www.iht.com/articles/2007/09/06/bloomberg/bxespn.php

ESPN may bring Disney less profit
By Andy Fixmer
Bloomberg News
Friday, September 7, 2007
LOS ANGELES: ESPN, the U.S. cable television network that has driven profit growth at Walt Disney for much of this decade, may produce smaller gains in coming years, crimping the company's stock price, analysts said.
Professional football, baseball, basketball and auto racing contracts that take effect by October 2009 will raise expenses by $1.02 billion a year, just as agreements with the cable operators Comcast and Time Warner Cable limit increases in subscribers to an annual average of 7 percent, a UBS Securities analyst, Michael Morris, estimated.
The cable unit, the source of 46 percent of Disney's operating earnings last year, will see profit growth fall by four percentage points, or about $160 million, in fiscal 2008 from the year ending this month, Morris said. At the same time, broadcasting and theme parks will also generate smaller increases, and film studio earnings will drop 19 percent, he estimated.
"Disney is entering a period of slower growth," Morris said. "ESPN is at the center of that equation."
Ten of Disney's 12 biggest institutional shareholders have reduced their stakes, filings from June show.
Disney shares are little changed this year, after rising 42 percent since Robert Iger took over as chief executive 15 months ago. They closed Wednesday at $34.04 on Wednesday, 6.2 percent below the six-year high of $36.30 set May 23. Shares were down 12 cents to $33.92 is early trading Thursday.
"The only way the company can continue to crank is if they continue to basically have a lock on the sports market at ESPN," said Richard Steinberg, of Steinberg Global Asset Management in Boca Raton, Florida, which sold more than half the 36,000 shares it held at the start of this year. Disney is betting that ESPN can increase revenue by expanding advertising online and on channels like ESPN2, and by selling premium Internet services. New sports contracts include rights to beam games to cellphones and other digital devices.
"We are getting tremendous value for these investments," said George Bodenheimer, president of ESPN and co-chairman of Disney Media Networks. "Our ability to maximize these agreements has never been greater."
ESPN makes up about 70 percent of the operating income of Disney's cable unit, Morris estimated. Profit at the unit, including Disney Channel and ABC Family, will climb 15 percent to $4.08 billion next year, after a 19 percent rise this year, he estimated.
ESPN is seeing increased competition from networks run by the National Football League, Major League Baseball and the National Basketball Association. Comcast, in Philadelphia, Time Warner Cable in New York and the satellite provider DirecTV Group in El Segundo, California, have all added sports programs.
ESPN collects as much as $3.25 a subscriber in monthly affiliate fees, the highest in cable, compared with about $2 for News Corp.'s Fox Sports, the media researcher Paul Kagan said. The fees make up roughly two-thirds of ESPN's revenue, and rose 10 percent to 20 percent annually before the recent contracts, he estimated.
Disney's investments in the Internet and in video games will not pay off fast enough to make up for the decline in cable and film, Morris said.
Net income may increase 2.9 percent to $4.23 billion in 2008 from a projected $4.11 billion, excluding a gain from asset sales this year, Jonathan Jacoby, an analyst for Banc of America Securities in New York, wrote in a research note last month.
Disney repurchased $5.2 billion of its stock in the first nine months this year. An additional $2.5 billion in buybacks through 2008 will lift earnings by 8 cents a share, Morris estimated.
The company agreed to pay $1.1 billion a year for eight years of Monday night NFL games on ESPN starting last season, up from the $550 million a year paid by Disney's ABC, which also shared rights to the Super Bowl.
Annual outlays of $293.5 million for baseball, up from $141.8 million, and $270 million starting this season for Nascar, the stock car racing circuit, are raising programming costs, Morris said. Both deals cover eight years. Pro hockey, the baseball playoffs, PGA golf and Sunday NFL games have been dropped.
An eight-year agreement with the NBA in June will increase ESPN's cost to carry games by $97 million annually to $496.9 million beginning in October 2008, Morris estimated.
During a conference call in August, Iger was asked about the potential for increasing profit margins at Disney units.
"It will be hard to grow their margins over the long term, even though ESPN will continue to deliver significant growth for the company," Iger said. "They are coming off, as you know, a relatively high base." 

 Copyright © 2007 The International Herald Tribune | www.iht.com



http://mediabiz.blogs.cnnmoney.cnn.com/2007/11/08/disney-scores-thanks-to-espn/

November 8, 2007
Disney scores thanks to ESPN
"When you wish upon a star, your sales and profits can go so far. Anything your heart desires will come to you."
That's what I imagine Walt Disney (DIS) CEO Bob Iger is singing after the media giant and Dow component reported strong fiscal fourth-quarter results Thursday. But I'm a little strange. Disney's report wraps up a busy two weeks for the media conglomerates. The House of Mouse reported earnings that topped expectations on sales that were roughly in line with consensus estimates. So how did Disney do it?
Well, considering that media rivals Viacom (VIAB), Time Warner (TWX) and News Corp. (NWS) all reported solid results from their cable networks, it should come as no surprise that Disney's cable channels also did well. (Time Warner owns CNNMoney.com.)
Disney said that revenue from its cable networks rose 24 percent in the quarter, led primarily by strength at sports juggernaut ESPN. Operating income from cable surged 30 percent in the quarter. The company's cable networks unit also had a massive ratings hit with Disney Channel's "High School Musical 2."
The healthy cable results helped to offset the fact that sales in Disney's broadcasting unit, mainly comprised of the ABC network, fell 5 percent. The division posted an operating loss of $30 million.
The cable and broadcasting units make up Disney's media networks division, which is the company's largest contributor to sales and operating profits. Overall, sales in the division were up 14 percent and operating profits increased 25 percent.
And during a conference call with analysts, Iger said he was optimistic about ABC's chances for the remainder of the season thanks to several new shows that have done reasonably well ratings-wise, including "Grey's Anatomy" spin-off "Private Practice," "Pushing Daisies" and "Samantha Who?"
Disney's theme parks and resorts division was another source of strength for the company, apparently proving that the subprime mortgage crisis and rising energy prices are not having an impact on leisure spending. Revenues increased 10 percent and operating profits rose 9 percent. "Even though there are things going on in the economy, people are not giving up their family vacations, particularly to Disney destinations," Iger said.
Interestingly, though, the company's studio entertainment division reported a sharp decline in quarterly sales and profits, despite box-office hits "Pirates of the Caribbean: At World's End" and the latest animated film from Disney's Pixar unit, "Ratatouille." By contrast, Viacom, News Corp. and Time Warner all reported revenue and profit increases in their film studio divisions in their most recent quarters. Then again, Disney was hard-pressed to beat last year, when "Pirates of the Caribbean: Dead Man's Chest" was the top grossing film.
Going forward, Iger said Pixar will become an even more important part of Disney's studio unit and the overall company. He said Disney was in the process of developing an online virtual world based on the movie "Cars" and added that "Cars" was a candidate for a possible theatrical sequel. He also said that he was very excited about "Toy Story 3," which is currently in production and is scheduled for a release in 2010. 


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